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April 20, 2015updated 22 Sep 2016 11:47am

Mobile payment conversions and why UK could be the next Sweden

Q+A: Find out how payment conversions are changing.

By Alexander Sword

CBR sits down with Niklas Adalberth, Deputy CEO and Board Member of Klarna, to discuss why his business is going down a storm with vendors.

Q: Why is Klarna’s "pay later" model such a big hit and what gave you the idea for it?

It’s not so much about paying later that consumers prefer. It’s more about separating when you buy something from when you actually need to pay for it, which removes the friction from the point of purchase.

If you’re on mobile and you happen only to have five minutes on the subway, or you’re sitting in a convenient situation, you may not want to bring out your credit card and finalise the transfer. Getting the opportunity to press ‘buy now’ is what you’d really prefer.

That’s also what the merchants prefer, since that will increase their conversion rates. So that’s what we’ve been able to create – a very easy way to settle right away if you want to, or 14 days later when you’re sat at your desktop.

Q: You have a very high conversion rate for mobile shoppers. How does that translate to sales for vendors?

If you reduce the friction and don’t force people to enter their credit card when they want to buy something, that will increase the conversion rate. For example, is a super-fast growing eCommerce company; we increased their sales by 40 percent thanks to the removal of the friction in the checkout.

Q: So what is Klarna’s IP?

The IP is all about being able to do a risk assessment based on the limited data that you as a consumer enter in the checkout. The first thing you need to enter as a first time customer to Klarna, without downloading or registering anything, is your email address and ZIP code. If we don’t recognise that, then you also need to enter your address, but that’s it. That’s the only thing you need to enter.

Based on that information we do this very sophisticated risk analysis decision which takes about half a second, which decides if you’re eligible to pay later, who most people get. Behind all of this, which looks very simple at the checkout, we are a team of 350 engineers. We have 80 people working on improving this algorithm, which is the intellectual property of Klarna.

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Q: So how does it integrate with the vendor’s site?

From an integration perspective it’s an iframe that is hosted by us. When you do a purchase and start to enter your details, it is actually transferred to us. We do the risk algorithm and instantly enable you to just press "buy now". This is without registration and without downloading an app.

So for example, if you wrote, a ZIP code that we don’t recognise, you write everything with capital letters and you want to buy three iPads, which is very rare – then we would actually force you to enter your credit card details in advance. Then it would be just like any other checkout out there. But the majority would get this very smooth experience.

The banks approach this problem with the 1 to 2 percent fraudsters by punishing everyone going into the checkout, having to go through this really complex process. We know that 85 percent is very likely to pay for their goods. So why not for them provide a very simple experience, and for these last 15 percent, of which we cannot tell which 1 to 2 percent will not pay, why not have them enter their credit card details in advance?

Q: Could banks do this in the future?

We’ve done this now for ten years, and we were lucky to start off in Sweden, because there’s so much public data.

To redo this and start off in the UK is almost impossible because of the knowledge we’ve built up. We’re handling 250,000 transactions every day. We have over the last ten years built up a tremendous amount of knowledge into behavioural scoring. So to reproduce that is quite difficult for the banks, especially when they are working with old systems whereas we have completely new systems.

Q: What has the mobile experience done to drive this market for convenience?

Convenience is absolutely the main driver in countries like the UK and US, but actually, the business started out with safety. So you never pay anything until you get the stuff, till you can touch and feel it. That’s when you transfer.

That was the proposition in the first years – that you should never pay up front, that you should always wait. That then developed into this convenience aspect, which works very well on the mobile where you don’t have a proper keyboard and it takes so much time to finalise a purchase. There’s been a huge pivot in Klarna in the last three years when we’ve developed this new product.

Q: So the picture for the company ahead looks quite good, as people move to more mobile purchases?

The entire eCommerce is suffering a lot from a very bad conversion rate on mobile, and at the same time they are seeing increasing traffic on mobile and tablets – increasing like crazy.

Almost all merchants i’m speaking to now, more than 50 percent of their traffic is coming from smartphones and tablets. But the conversion rate is a tenth, a quarter – very much lower than what they have on the desktop.

This is the number one problem – increasing traffic but the inability to convert it.

Q: You commented before that it would be hard to build up a database in the UK – so how are you doing this as you move into market?

What we’ve discovered since we’ve been in so many different markets, many of those have become very scalable in terms of behaviour of data, which is the same across countries. If you buy a book about beer, it’s higher risk than a book about champagne. If you write with capital letters, it’s higher risk than if you write with normal letters. If you buy something at 3.00 during the night, it’s higher risk than 3.00 during the day. This goes for all countries. Then when we build specific profiles and tap into the open data source, that is just an add-on since we’re able to have these common models.

Q: Does the UK market differ from others?

The number one observation is probably the sophistication. UK shoppers and merchants are the most advanced in Europe. It is way ahead of other geographies. Maybe not some of the Nordic ones but definitely compared to the Netherlands, Germany, France or Spain.

It also benefits a lot from European sales. A lot of people have English as their second language. They can’t find the products in their local eCommerce community. They search on the web, and since they recognise English, they do shopping on the UK site.

Q: You also have a US launch coming up. Is that market similar to the UK?

UK and US are different to other markets because credit card penetration is so high and people trust credit cards so much. The proposition we use mainly in the other markets is use Klarna because it’s the safest way of shopping online because you never have to pay upfront if you don’t want to.
In UK and US, it’s all about the convenience.

In that sense, the UK and US are very similar compared to other geographies.

Q: Why is Sweden producing such great tech companies at the moment?

It’s not a single answer. One thing we used to joke about is that the weather in Sweden is bad and it gets dark very early. People can’t do much else except work hard.

The government actually had two initiatives that we are now seeing the fruits of from many years ago. The first was to give subsidised computers to everyone, which was a reform they introduced in the early 90s. Swedish people got used to computers to a larger extent than others in the world. I think we’re seeing now that we’re very early adopters in technology.

The second was that the government made sure everyone had access to broadband. Having access to broadband and being top of the world in that – you can introduce services on top of that infrastructure and then you’re ahead of the game, being able to have these streaming services and payment solutions.

Finally, we have had good role models – everything from PriceRunner to Skype. Swedish people got the confidence that we could produce great companies. So success feeds success.

Q: As the UK pays more attention to its tech sector, people are wondering why we haven’t produced a Spotify or a Skype.

It will definitely come. It will take some time. Looking at how active the politicians are in the UK compared to Sweden: I’ve been invited to 10 Downing Street three times, whereas I’ve never been invited to the Swedish equivalent. This spotlight that the government is putting on the tech scene: I’m absolutely sure that you will see the pay-off from that in the next five to ten years.

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